Students of Class 12 Commerce should refer to the HOTS Accountancy Class 12 Issue and Redemption of Debentures with solutions given below, this will help them to understand the concepts and related questions given in the Class 12 Accountancy textbook. It’s very important to understand High Order Thinking Skills questions and answers to get better marks in examinations. Also refer to DK Goel class 11 book pdf download free

Question: Gupta Ltd has incurred a loss of Rs. 8,00,000 before payment of interest on debentures. The directors of the company are of the opinion that interest on debentures is payable only when company earn profit. Do you agree?

Answer: No’ because Interest on debentures is a charge against profit and not an appropriation of profit.

Question: As per latest guidelines governing the servicing of debentures a company is required to create on special account. Name that account.

Answer: Debenture Redemption Reserve Account.

Question: Name the method of redemption of debentures in which there is no requirement of creating Debenture Redemption Reserve.

Answer: Redemption of debentures by conversion.

Question: What is the maximum rate of interest which the board of directors of a company can normally pay on calls-in-advance if the articles are silent on the matter of such interest?

Answer: According to table ‘A’ not exceeding 6 % p.a.

Question: State in brief, the SEBI guidelines regarding Debenture Redemption Reserve(DRR).

Answer: As per SEBI guidelines, an amount equal to 50% of the debenture issue, must be transferred to DRR before the redemption begins.

Question: Which companies are exempted from the obligation of creating DRR by SEBI?

Answer: The following companies are exempted from the obligation of creating DRR –
(i) A company which has issued debentures with a maturity of 18 months or less.
(ii) Infrastructure companies, which are wholly engaged in the business of developing, maintaining and operating infrastructure facilities.

Question: On 1st July 2007. A Ltd gave notice of their intention to redeem their outstanding Rs. 400,000 8% Debentures on 1st January, 2008 @ rs. 102 each and offered the holders the following options-
(a) To subscribe for (i) 6% cumulative preference shares of Rs. 20 each at Rs. 22.50 per share, accepted by debenture holders of Rs. 1,71,000 or (ii) 12% debentures were issued @96% accepted by the holders of Rs. 1,44,000 Debentures.
(b) Remaining debentures to be redeemed for cash if neither of the option under (a) was accepted. Pass necessary journal entries.

Answer: Hints-
(1) Case a (i) – No. of preference shares issued 7752.
(2) Case a (ii)- No. of debentures issued 1530.
(3) Remaining 85000 debentures paid in cash.

Question: Virani Industries Ltd. issued 1,00,000, 10% Debentures of Rs. 10 each at a discount of 9% on April 1st, 2001 redeemable as follows:
31st March 2003 – 20,000 Debentures
31st March 2004 – 30,000 Debentures
31st March 2005 – 20,000 Debentures
31st March 2006 – Remaining Debentures
Calculate the amount of discount to be written off each year and prepare discount on issue of debentures account.

Answer: Amount of discount = Rs. 90,000
Discount to be written off:
2001-02 – Rs. 25,000
2002-03 – Rs. 25,000
2003-04 – Rs. 20,000
2004-05 – Rs. 12,500
2005-06 – Rs. 7,500

Question: The following balance appeared in the books of Z Ltd. on January 1, 2004.
12% Debentures A/C Rs. 1,50,000
Debenture Redemption Fund Rs. 1,25,000
Debenture Redemption Fund Investment Rs. 1,25,000
(Represented by Rs. 1,47,500, 3% Govt. Securities)
The annual installment added to the fund is Rs. 20,575. On December 31, 2004, the bank balance after the receipt of interest on investment was Rs. 39,100. On that date all the investment were sold at 83% and the debentures were duly redeemed. Show the necessary ledger accounts for the year 2004.

Answer:
Hint : (i) Loss on sale of investment Rs. 2575.
(ii) Amount transferred to General Reserve Rs. 1,47,425.

Question: On 01-04-1999, A Ltd., issued 2000, 7% debentures of Rs. 100 each at a discount of 10% redeemable at par after 4 years by converting them into equity shares of Rs. 100 each issued at a premium of 25%.
Pass journal entries in the following cases:
(i) If debentures are redeemed on maturity.
(ii) If debentures are redeemed before maturity.

Answer: Case (i) – No. of Equity shares to be issued 1,600.
Case (ii) – No. of Equity shares to be issued 1,440.

Question: Blank Enterprises issued 30,000 12% debentures of Rs. 10 each at par to be redeemed
out of profits after 5 years at par. Debentures are callable after 3 years at an exercise price of
Rs. 11 per debenture. After 4 years the company invoked the call option and holders of the
nominal value of Rs. 50,000 responded to the call option. Record the necessary Journal
entries.

Answer: At the rate of 5% p.a.

Question: What is meant by issue of debentures as collateral Security?

Answer: JOURNAL

Question: On 1.1.2005, Fast computers Ltd. Issued 20,00,000 6% debentures of Rs. 100 each at a
discount of 4% redeemable at a premium of 5% after three years. The amount was payable as
follows:
On application Rs. 50 per debenture balance on allotment.
Record the necessary Journal entries for issue of debentures.

Answer: Journal

Question: What do you mean by “Trust Deed” in context of debenture?

Answer: Journal

Question: Promising Company Ltd. Took a loan of Rs. 10,00,00,000 from a bank giving Rs.
12,00,00,000 9% debentures as collateral security. Pass the necessary Journal entries
regarding issue of debentures, if any, and show this loan in the Balance Sheet of the
Company.

Answer: Journal

Question: Pass the necessary Journal entries in the books of A B Ltd. for the following
transactions:
(i) Issued 5,00,000 12% debentures of Rs. 100 each at a discount of 6% repayable at a
premium of 6%.
(ii) Converted 100, 12% debentures of s. 100 each into 9% preference shares of Rs.
100 each issued at a premium of 25%.
(iii) Converted 100, 12% debentures of Rs. 100 each issued at a discount of Rs. 10
each.

Answer:

Question: Gopalan Ltd. purchased 5,000 of its own 8% debentures of Rs. 1000 each at Rs. 987 per
debentures. It also purchased another lot of 600 debentures of the same services at Rs. 986.
Record necessary Journal entries in the books of the company.

Question: Pass journal entries for the following at the time of issue of debentures:
(a) B Ltd. issues 30,000, 12% Debentures of Rs. 100 each at a discount of 5 % to be repaid at par at the end of 5 years.
(b) E Ltd. issues Rs. 60,000, 12% Debentures of Rs. 100 each at a discount of 5 % repayable at a premium of 10% at the end of 5 years.
(c) F Ltd. issues Rs. 70,000, 12% Debentures of Rs. 100 each at a premium of 5 % redeemable at 110%.

Question: Anirudh Ltd. Has 4000, 8% debentures of Rs. 100 each due for redemption on March
31,2005. The company has debenture redemption reserve of Rs. 1,50,000 on that date.
Assuming that no interest is due, record the necessary Journal entries at the time of
redemption of debentures.

Answer: Employees stock option plan as introduced by companies (Amendment) Act, 2000
means an option (right and not an obligation). Given to the whole time directors
and employees right to purchase shares of a company at a pre-determined price,
which usually is lower than the market price.

Question: The company allots 1,000 12% debentures of Rs. 100 each at issue prices of Rs. 96 per
debenture redeemable at a premium of Rs. 8 per debenture. The liability of premium is also to
be recorded at the time of issue of debentures.

Answer: Issued capital is that part of Authorised capital which is actually offered to the
public for subscription. Issued Capital may or may not be different from
Authorised Capital depending upon whether the whole amount is offered to the
public or not.

Question: What is meant by issue of debentures as “Purchase Consideration”.

Question: Vijaya Ltd. Acquired assets of Rs. 40 lakhs and took over creditors of Rs. 4 lakhs from
Sunil Enterprises. Vijaya Ltd. Issued 12% Debentures of Rs. 10% as purchase consideration.
Record necessary Journal entries in the books of Vijaya Ltd.

Answer: Private placement of shares means raising capital through private sources and
contacts. In such a case shares are issued to promoters, their friends and relatives,
share holders of group companies, mutual funds, NRI’s, Financial Institutions etc.
Options:
a) Sweat Equity Shares
b) Employees Stock Option Plan